Wall Street recoils after good news on the economy raises inflation worries

NEW YORK —  U.S. stocks fell Friday on worries that good news about the job market may be too good and prove to be bad for Wall Street by keeping inflation and interest rates high.

The Standard & Poor’s 500 tumbled 1.5% to close its fourth losing week in the last five. The Dow Jones industrial average and the Nasdaq composite index both sank 1.6%.

Stocks took their cue from the bond market, where yields leaped to crank up the pressure after a report said U.S. employers added many more jobs to their payrolls last month than economists expected.

Such strength in hiring is of course good news for workers looking for jobs. But it could also keep upward pressure on inflation by keeping the overall economy humming. That in turn could dissuade the Federal Reserve from delivering the cuts to interest rates that Wall Street loves. Lower rates can not only goose the economy but also boost prices for investments.

The Fed has already indicated it’s likely to ease rates fewer times this year than it expected earlier because of worries about higher inflation. That’s in part because some officials are taking seriously the possibility of tariffs and other policies coming from President-elect Donald Trump that could worsen inflation.

To be sure, Friday’s jobs report may not be as strong as it seems on the surface. Although the overall number of hires in December blew past expectations, “manufacturing is still getting crushed,” said Brian Jacobsen, chief economist at Annex Wealth Management.

“The macroeconomy may be fine,” he said, “but each individual’s microeconomy could look very different.”

The raises in pay that workers are getting are also an important data point for the Fed, and gains in average hourly earnings were below 4% last month. That’s what “the Fed wants to see,” according to Wells Fargo Investment Institute Senior Global Market Strategist Scott Wren.

The nuanced takes helped Treasury yields give back some of their initial bursts after the release of the jobs report. But preliminary results from a separate report later in the morning underscored the issue. It suggested U.S. consumers are getting more pessimistic about where inflation is heading.

Consumers are expecting inflation in the coming year to be 3.3%, up from their expectation of 2.8% last month. It’s the highest reading in the University of Michigan’s survey since May. Expectations are worsening across the board, particularly for households that earn less, said Joanne Hsu, director of the Surveys of Consumers.

The problem for Wall Street is that when traders were sending U.S. stock indexes to dozens of records last year, they were banking on a stream of rate cuts coming from the Fed. If fewer cuts materialize than expected, stock prices probably would need to fall, or profits at companies would have to rise more strongly to make up for it.

Smaller companies can be hit harder by higher interest rates than their bigger rivals because of the need for many to borrow to grow. The Russell 2000 index of smaller stocks slumped 2.2%.

Constellation Brands tumbled 17.1% for the biggest loss in the S&P 500 after the seller of Modelo beer and Robert Mondavi wine reported weaker profit and revenue for the latest quarter than analysts expected. Chief Executive Bill Newlands said the company is seeing subdued spending from its customers, who are looking for better values.

Insurance companies were also under pressure as wildfires continue to burn in the Los Angeles area. Many of the homes that have been destroyed were in expensive areas where the typical price can top $3 million. Such high-priced damage could eat into insurers’ profits. Allstate fell 5.6%, Travelers dropped 4.3% and Chubb lost 3.4%.

Delta Air Lines was able to fly 9% higher because it delivered a stronger profit report for the last three months of 2024 than analysts expected. The airline said it’s seeing strong demand for travel, which accelerated through the end of last year, and it expects that to continue into 2025.

Big banks will begin reporting their results for the end of 2024 next week, as earnings season gets underway in earnest.

All told, the S&P 500 fell 91.21 points to 5,827.04. The Dow dropped 696.75 points to 41,938.45, and the Nasdaq composite sank 317.25 points to 19,161.63.

In the bond market, the yield on the 10-year Treasury jumped to 4.76% from 4.68% late Thursday. In September, it was below 3.65%, marking a major move for the bond market.

The yield on the two-year Treasury, which moves more closely with expectations for what the Fed will do in the near term, climbed to 4.38% from 4.27% late Thursday.

Friday’s jobs report means traders see it as a near certainty that the Fed will not cut interest rates at its next meeting later this month. That would be the first time it has stood pat after three straight cuts to interest rates.

A growing minority of traders on Wall Street are saying the Fed might not cut rates at all in 2025.

Choe writes for the Associated Press. AP writers Matt Ott and Elaine Kurtenbach contributed to this report.